A Simple London Breakout V.2

Joined Jan 2007
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Status: Every new idea looks crazy at first
|1,618 Posts

I've had to adjust my thinking to this strategy a little because before, we were concerned about catching the breakout and that was it. Now we're going to pull pips off the reversals that were plaguing us to help offset any full reversals we'll encounter and to be ready with trades already in place when the breakouts occur. Now, we will not catch every breakout, but that is okay as we are not going to sacrifice discipline for the sake of making profits, it doesn't pay to be greedy. Here you will find a revised version of my Simple London Breakout strategy. After some complications with regards to handling reversals within the original strategy, I sat down and studied the past charts to try and find a better way to take advantage of the days where we would get stuck in a ranging period. What I wanted to accomplish was to try and alleviate, or at least minimize, the damage of being stopped out on those reversals after our initial entries.

As I was finished working on other projects, I came back to my original strategy and I noticed a few things that were happening that we could take advantage of and make work to our benefit. I also found a few ways to try and help protect our profit taking along the way. What I was seeing was how often we would have our entry point hit and then magically have an immediate reversal right after that. A good friend suggested that in may be due to the fact that I was starting too early (the first strategy had the box end at the Frankfurt open at 7:00 GMT) and that I should include that whole hour and start the box right at the London open because we were probably getting false spikes from the Frankfurt open. He also suggested that maybe try and use the old entry point as a target instead. I will have to give some credit to rjlacha as I then remembered he open a thread a while back and was using the edge of the box as his entry point and I thought that could possibly work.

So, with the help of sqaulou's extraordinary coding skills, we develop a modified version of the London Breakout indicator for everyone to use (sqaulou is currently playing around with a new EA for this strategy which will come later after it is tested properly first). What we did was use the edge of the box as the new Entry Point the way rjlacha uses it and and incorporated a 3 tiered Profit Target setup to grab pips earlier in the trade and still be able to take more pips when the breakout occurs. As you all know, I am a big user of martingale techniques and that is carried over from the first thread with a little twist to it that I'll explain later as we put up some examples. So over the next few posts I'll be showing examples of perfect setups, reversal setups, and how we take profits in different scenarios.

The big difference in the modified indicator is that the "MaxBoxSizeInPips" parameter is now "MinBoxSizeInPips". The reason why is because our first profit target is not far from the entry point and we don't want the spread to eat up all the profit. Because of the parameter change it is best to use pairs with a smaller spread. You can use a pair with a larger spread but make sure to increase the "MinBoxSizeInPips" appropriately (default is 25). We really want to stay away from large boxes over 100-120 pips because Target 1's will be tough to reach and stop outs when we have reversals will be very costly. We have incorporated a 3 tiered profit target to this indicator to help the trader to visually see when to close each trade and when to adjust your stops. The default box times are from 05:00 to 08:00 GMT and we will not place any new trades after 17:00 GMT on Fridays as we do not want to get caught up in any gaps over the weekend. In fact, if you are showing any sign of profitability, I would suggest closing the trade and not holding them over the weekend. If your broker is GMT +0, you do not have to change anything. But if your broker for example is GMT +2 as with FXCBS (this is the broker I will be using for my examples), just add 2 hours to all the times to be correct. I'm using FXCBS because they have very lows spreads. You can check the spread of most brokers here to see where they stand compared to others. I've attached this indicator here to post #1 along with my template that I use.

I will only be watching 5 pairs on a 15 minute chart:

Eur/Usd, Gbp/Usd, Eur/Jpy, Usd/Cad, and Gbp/Jpy.

Gbp/Jpy is my experimental pair and have raised the minimum box size to 35. I will give setup examples using all the pairs but I will only be posting trade examples on Eur/Usd only to save time. I'm sure everyone will get the hang of it pretty quickly and be able to read the other charts on their own.

*Before we start, as courtesy, please refrain from comments about the nature of martingale strategies. We all know by now any inherent risks involved with using them and do not need to be reminded over and over. If you are one of those who hate martingale strategies, please just move on and not disrupt the thread, this will obviously not be for you. Also, please do not flood the thread with "you should do this or add this" or "this would work better" comments. I want prefer to stick to the original strategy posted, but if you want to play around with the settings and add other indicators, please feel free to do so on your own, otherwise it confuses those who want to follow the original premise of the strategy, thank you.*

***UPDATE***

Alright, sqaulou, our coder extraordinaire, has modified the indicator and added two new functions. Well, actually, one function was an old function that was added back in and the second one is new.

First one he added back into the indicator was the "MaxBoxSizeInPips" function. This works similar to the "MinBoxSizeInPips" parameter in that it draws a red box that says "No Trade!" when the box is over "X" number of pips

Now the new function added to the indicator is called the "LimitBoxToMaxSize". What it allows us to do on occasions where the standard box size is too large, is it limits the tradable box size to "X" number of pips. The indicator will then calculate and center the box based on the median EMA comprised of the 12 bars of the box. that way we start with a box that is not too wide, but properly centered.

Examples are shown in posts 62 & 63. I've updated the template to use the new version of the indicator.

***UPDATE*** 8/17/10V3.1

sqaulou and I have added two (2) more target levels to the LBO indicator and have posted it below along with a new template. For those traders out there that like to let your trades run, this is for you. The neat option sqaulou added on this one is when you set the "TPFactor5" to "0", the indicator will only show 3 targets instead of 5.So you basically have 2 indicators in one. He also added a "BO" comment below the box (for BreakOut) to help distinguish the BreakOut strategy from the new Counter Trend strategy that will be introduced.

You will only see the input for TPFactor5 in the indicator's parameters because TPFactor 4 is calculated the same as TPFactor2, by adding Target 3 & 5 together and dividing them by 2. Target 5 is set to the 3.618 Fib extension by default. Feel free to change it to whatever you are comfortable using. He has also fixed it to where the zones are drawn over the weekend as well.

***UPDATE*** 1/1/11

I have made a few changes (starting in post #988) regarding how to close trades and have e-mailed sqaulou to see if he can update the EA with these new changes

Joined Jan 2007
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Status: Every new idea looks crazy at first
|1,618 Posts

The initial trade setup is determined after the box has formed. Once formed we wait for a candle to breach the edge of the box, either long or short. The stop is going to be the opposite side of the box as in the previous thread, but this time around we will be moving the stop as targets are hit.

Joined Jan 2007
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Status: Every new idea looks crazy at first
|1,618 Posts

When placing trades in the original strategy we only placed a single trade at the entry point and waited til we hit a target or got stopped out. With this strategy, you can place a single trade, 2 trades, or even 3 trades at the entry point. I will be placing 3 trades at the same time for all examples I will be giving you.

Again this is how a perfect trade would go:

1.) Price hits our entry point and we place three individual trades of whatever size your money management will dictate (make all 3 trades the same size).

2.) As price hits our Target 1, we close 1 of the trades and leave the other two trades open. Once the trade is closed (referred to as trade 1 from here on), move your stop on the other two trades to break even or as I do, break even +1 (guarantees you at least 1 pip upon a reversal).

3.) As price hits Target 2, we close 1 more trade (trade 2) and leave the last trade open. Once that trade is closed, move your stop on the last trades to Target 1 to lock in pips.

4.) As price hits Target 3, we close our last trade (trade 3).

In the pic below, on Gbp/Jpy last night we had a perfect trade setup that netted us +200 pips total on 3 individual trades (not including the spread). Perfect trades do not happen as often as we'd like to see, but that's okay, we have a plan for that.

Trade 1= +47
Trade 2= +100trade 3= +153
Total = +200

If your using only 1 trade, just move your stop at each target level. If you use 2 trades, close out trade 1 at Target 1 and move the stops on trade 2 as you reach each target. Like I said, I'm using 3 trade as I then can take 1 trade out at each target level.

As I said in the previous post, perfect trades do not come around very often as they usually present themselves after a reversal. In this example, we had a couple of reversals before our perfect trade occurred. Now the weakness of the strategy is that when price hits our entry and reverses, we have 3 trades on the line and not 1. Instead of having a -26 pip loss (which is the size of the box), we have a -78 pip loss (3 trades x 26 pips).

This is where the martingale comes in to save the day. I use a multiplier with my trades when I have a loss and the sequence goes 1, 2, 5, 13, 34, 89, 233, and 610. I've noticed with this new version of the strategy that the multiplier rarely goes past 34. How the multiplier works is once we hit our stoploss, we close out all 3 trades and immediately enter 3 more trades short using the next multiplier in the sequence, in this case it would be 2. if we use .1 lots for an example, we would open those next 3 trades at .2 lots.

In this trade we had 2 reversals before we had our breakout. The first reversal we had stopped us out for -78 pips (3 x -26). We enter 3 more trades immediately using a multiplier of 2 to whatever lot size you used in the first trade. We ended up with a second reversal which stopped us out at -156 pips (3 x -26 x a multiplier of 2). Again, we immediately entered 3 more trades, this time with a multiplier of 5.

As we can see, the multipliers help us recoup are losses on the previous trades that didn't quite go our way. This is what it would look like with and without the multiplier:

Quite a bit of difference, don't you think? Feel free to use your own style of multiplier and experiment a little. Some will just want to get the losses back with no additional profit and some will want a more aggressive approach.

Joined Jan 2007
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Status: Every new idea looks crazy at first
|1,618 Posts

Most of the time we are going to see reversals off of Target 1 a lot in this strategy and we need to grab the pips when we can. The Target 1 is placed at the 61.8 fib extension of the box, so it is going to be a natural reversal point and this was causing most of the issues in the original thread since we were using it as an entry point instead of a target.

In this example on Usd/Cad, we can see the long entries reversing off of Target 1. The is the reason I have you move the stop to break-even or break-even +1 after hitting Target 1 is because we are primed for a reversal at this point and saves us from losing money on trade 2 & 3. If I would've trade the first long, I would've made +34 pips on trade 1 and +1 pips each on trade 2 & 3 when they were stopped out on the reversal.

Joined Jan 2007
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Status: Every new idea looks crazy at first
|1,618 Posts

I'm sure a lot of you are wondering is there a rule to re-entering a trade? Yes. If you follow this rule it will save a lot of bad entries.

Do not re-enter a trade until a candle closes inside the box!

If we continue with the Usd/Cad chart from the previous post we can see that after we closed out our first set of trades we have a candle closing inside the box both at 13:30 and 16:00 GMT (15:30 and 18:00 GMT on FXCBS) The first re-entry netted us another +34 pips on trade 1 and then +1 pip each on trade 2 & 3 on the reversal (remember, we moved our stop to breakeven +1 upon hitting target 1!). The second re-entry was made as a short trade and we netted another +34 pips on trade 1 and trades 2 & 3 netted +72 and +111 pips respectively for a total of +289 pips, although we had to wait til the next day to close trade 2 & 3 out.

I prefer to let the remaining open trades run until they hit a target or stop out, just my preference. You can close out all open trades whenever you desire. I will not open any new trades after 01:00 GMT which is the end of the green zone on your charts.

I'll let everyone catch up and soak everything in and I will post some more examples later on.

Joined Jan 2007
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Status: Every new idea looks crazy at first
|1,618 Posts

Thanks for stopping in guys, if you any questions don't hesitate to ask.

Next example I want to show is handling a reversal and not getting to a target 2 or 3 and how to handle this. We can see as we start out with a target 1 being hit for +37 pips and then getting a stop out for trade 2 & 3 for +1 pip each. We have a candle close in the box at 13:45 GMT but the next candle spikes up and triggers a long trade. We were hoping the long would continue, but it does not and stops us out for -180 pips (-60 x 3 trades). Now we close out those trades and immediately enter 3 new trades using a multiplier of 2. Normally at this point we hope that we can get down to a target 2 which would guarantee we recoup our loss. Unfortunately, this doesn't happen as we only get +74 pips back at target 1 before we retrace and then trade 2 & 3 get closed out for +2 pips each. We get another candle that closes in the box at 19:30 GMT and another short trade opportunity triggers on the next candle. You can now go to a multiplier of 5 here if you choose, but since we're still within the same trading day and we still haven't recouped our loss, it would be safer to stay at a multiplier of 2 as the London session has closed and the U.S. market is the only session open. The price shoots up a little and actually bounces off the 38.2 fib from the big downswing we just had. I'm thinking this should be a good continuation trade and we'll get our money back but it takes a drastic upturn and stops us out again for a -360 pip loss (-60 x 3 trades x multiplier of 2). Since we are past 01:00 GMT, we do not enter any new trades, so we'll wait until the new box forms. Since we did not recoup all of our losses back with a multiplier of 2, we open the next set of trades at a multiplier of 5. When going into the next day's box, you have a better chance for catching the early breakout, that's why I bump up the multiplier. Things finally work in our favor and we go all the way through all 3 targets. Any new trading opportunities now start back to normal lot sizes. Let's see how this panned out;

This goes to show you that you can't give up, even after a couple of reversals. This can show everyone that a calculated martingale money management can work, especially if you are watching several pairs to help offset losses from other pairs that are waiting to recoup those losses.

Joined Jan 2007
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Status: Every new idea looks crazy at first
|1,618 Posts

Quote

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Hopefully, I have the correct time settings. "Experimental" GJ results are very nice for overnight:

Best way to check is to open your MarketWatch and compare it to GMT time. I use Qlock and compare it to London, England. Just download the free version right below the solid line under the paid versions.

Best way to check is to open your MarketWatch and compare it to GMT time. I use Qlock and compare it to London, England. Just download the free version right below the solid line under the paid versions.

Ignored

What is your GMT+2 settings for indicator? (start time,end time, session end time..)

Another answer for martingale multiplier. 0.1, 0.2, 0.5... How to continue?